Continuing the Times discussion to respond to emails I’ve received

I had a flood of emails after the privatization piece appeared in the Times, and I don’t have time to respond to everybody, I’m sorry to say. However, to the guy who spent roughly a page and a half telling me that of course I would support higher taxes because I am a blood-sucking professor growing fat off the taxpayer, I just want to say one thing: USC is a private university, m’kay?

Now that I have that out of my system, we can talk about some of the other, more interesting questions that came in.

Are you saying we should or shouldn’t privatize?

I’m not saying either one. I am saying that privatization is inevitable if Americans don’t want to pay taxes for infrastructure.

We can cut back on supposedly “wasteful” projects (and we should), but those are about a millionth of a fraction as important to the total, overall maintenance needs budget than Tea Partiers make them out to be. We’ve had years and years of shrinkage in value from the gas tax because we don’t index it for inflation; in the interim, demand has risen. The fund shrinks, on and on. With the recession, demand has scaled back a little, but when you are using facilities and your funds are shrinking, the money for maintenance and repairs has to come from somewhere. And in a no-tax situation, that means privatization, or letting your maintenance go.

In general, there is very little evidence that suggests private infrastructure costs anybody less than projects simply owned and operated by governments. There are many reasons for this finding: privatization deals are often hamstrung politically–e.g., concessionaires limited in what they can charge no matter what the demand or unforeseen operating issues they can’t recover, etc etc etc, forced operation in faraway, unprofitable areas, etc. Many argue we haven’t seen terribly fair experiments with privatization, and they may be right. But they also may be wrong.

Is the US really in as much trouble as Greece?

No. The US economy, even with our recession, is massive; our debt is a portion of our total productive capacity. Greece, on the other hand, is underwater for lack of a better term. There’s a big difference there.

Forced privatization, however, can come from multiple sources. In Greece’s case, they have to sell, period. In our case, we could decide tomorrow to tax ourselves to get the revenues we need to maintain our existing system.

But if you simply defund infrastructure maintenance, the assets go to pot or you force governments to go looking for private investors. And that’s where the US is. We’re making bad decisions to defer maintenance and to seek public-private partnerships on new projects (which everybody still loves, all the chattering about “cutting the fat” notwithstanding).

The basic point of the op-ed is that yes, we can try to force gummint to privatize its services. But cutting off the funding and not maintaining the assets is a terrible way to do that, and forcing down government bond ratings is a Stupid McStupid way to do that.

But I think government is just too big and out of control. I want more privatization.

The better way to go forward with privatization, if you really, really, really ideologically hate government and would rather live in a world of tolls and fees for quasi-public goods, is to let government negotiate privatization deals when the assets are in good condition (desirable), and they can bring to the table something other than the concession rights—the ability to absorb some of the capital risks associated with large-scale infrastructure. That ability to deal with the risks associated with building and maintaining large-scale facilities, with bond financing, is really what governments can bring into public-private partnerships. If you constrain that ability with tax aversion and letting bond ratings go to pot, you hamstring the ability for institutions, both public and private, to draw on the sort of deeper, longer-term revenue-smoothing commitments that you need to build something like a train line between San Diego and Sacramento rather than a hotel.

Not keeping our infrastructure maintained is a bad strategy, even if we DO want to get parts of it out of gummint hands: private companies do not necessarily want to run concessions on poorly maintained facilities, and they do not want to inherit a maintenance risk. Used cars that have a certified maintenance record with them usually have a price premium over those that don’t–just so.

My taxes are already too high. I can’t stand anymore.

That may be true, but one final word of caution. There’s a reason why every single commentary on infrastructure privatization always includes the words “there’s no such thing as a free lunch.” Because there is no such thing as a free lunch in infrastructure. If you privatize infrastructure, you may (or may not) have lower taxes over time as those facilities move into private hands.

But Santa Claus doesn’t run private infrastructure projects: profit-making companies do. They need to charge tolls and fees for you to use their stuff so they can stay in business. So on the one hand, I’m told that Americans HATE tolls and fees, too. Well, best get over that if you want privatization because that’s how road/parking/park/school/etc concessionaires make their money.

Maybe the sum total of what you pay when you select out of some services and select in to only those you patronize, but there is little evidence to suggest that actually works out. There are always cross-subsidies, even in privately produced goods (the beer pays for a lot of the food in restaurants, etc).

Gummint workers are lazy and incompetent. We’d get better service if our roads were in private hands.

Ok, but if we weren’t all working in the same place, Dilbert wouldn’t be as funny as it is, now would it?

One thing that private companies do tend to be able to do better than governments: they differentiate levels of service to let people buy into the service level they want. It’s very hard for governments to charge a “first class” and “third class” fee on tax-supported goods. Service differentiation can really make a big difference in how well services are fit to market demand.

However, service quality on privately owned concessions tends to vary, too, for a whole bunch of reasons. Remember when United Airlines was putting the hammer down on its employees in the mid2000s? Worst. Service. Ever. Heaven Help You if your flight got cancelled.

Of course you want us to spend money on infrastructure! That’s how you make your living! You’re writing out of self-interest.

I hear this charge a lot. Truth be told, it doesn’t matter to me professionally whether we privatize or not. I have private companies asking me to consult, I have governments that ask me to consult. My skills are portable between sectors.

Ultimately, I think it’s an open question about whether we need to spend more money overall on infrastructure. Is it more important than education or health care? I can’t presume to answer that question. But it’s really hard to maintain markets and everything Americans say they believe in if nobody can get decent water service, our energy grid is outdated, and we have potholes big enough to swallow 1980s Buicks. Infrastructure is one of those things where you have to spend money to make money: casinos, for example, have routinely built their own little transit and road projects to make it easier for their customers to come gamble.

So whether we strategically disinvest or not, whether we decide never to build HSR or anything new ever again, we do have to maintain our system if we want to function as an economy. It’s like this: you either pay for repaving, or you pay for new shocks and struts on your car more often than if the roads were in good repair.

Keep the questions coming if you like, and thanks for reading.

A case of poor scaling in the choropleth property tax values

Note: if you are having trouble viewing the images, just click on the post title to make the whole post bigger.

I don’t know if the Tax Foundation means to be in the “fibbing with maps” category, but I have some problems with the data presentation that goes along with their new interactive tool where you can go figure out how your county stands up in terms of median property tax. I guess they aren’t really fibbing: more like just wasting our time with a map that doesn’t tell us anything new about property tax burdens.

I can’t figure out where this map originally came from, but I borrowed from the Tax Prof (who deserves a HT). But it has the Tax Foundation logo on it, so I assume they had a hand in making it. Pretty though it is, it’s not helpful.

Here goes:


You can see from the map that the scale on the property tax is exhausted at over $2000 year for median home values. Now, if you look at that, we can see that both Los Angeles County, where my beloved LA is, and Polk County, home of Des Moines, the capital of Iowa, are both dark blue, which means the median is above $2K a year. I’m guessing LA’s median property value is a wooncy bit higher than what we find in Des Moines, so let’s see how much got collapsed into that highest strata by looking at the interactive county tool, where the interesting stories come through.

In the tables, you get the tax paid as a percentage of median home value, a normalized figure–which is what should be mapped thematically if the Tax Foundation wants to tell us something interesting specifically about taxes, rather than home values. As it is, we’re probably getting roughly the same map here, particularly for the coasts, as we would if we just mapped median home values. Or population density. It’s better to separate the effects in a choropleth presentation if you have multiple things going on.

Voila Capture5

So Los Angeles ostensibly looks bad when you look at the tax ranking. It’s 10th in the country. And OMG it’s dark blue! But then when you look at the tax normalized by median home value, the state falls to 37th–the bottom half.

The normalization by median income doesn’t make that much sense, either, unless this is median income of homeowners. It’s likely in places like Los Angeles that some property tax is passed along to renters, but it’s probably not fully passed along, so using the median for the whole population, rather than just the median for the population of homeowners, is a bit misleading there. It’s hard to know what that story is, and it likely changes from period to period as rentals relative to demographics change.

Just to close the loop, let’s look at Des Moines.

Voila Capture6

Los Angelenos and Des Moines residents are paying at the median about the same raw amounts. Yes, there is some difference, but in 2009, it’s about $2,900 for the median Los Angeleno and about $2,400 for the median Polk County resident.

Well, then. What have we got?

We have the median resident of Des Moines paying a little over 1 percent of their home value in tax, while the Los Angeleno pays at the median about 0.61 percent. Los Angeles (and other places in California) are way towards the bottom: 655 out of 790 counties and 37th out of 50 in state ranking on taxes.

Proposition 13, at work. Untaxed wealth in your home value that will continue to grow over time for those who hang on to property due to the weird rules governing assessments under 13.